Report and Accounts for Holmes Funding



 Exhibit 10.15 
  
 HOLMES FUNDING LIMITED 
  
 REPORT AND ACCOUNTS 
  
 FOR THE YEAR ENDED 31 DECEMBER 2003 
  
 Registered No. 3982428 







 HOLMES FUNDING LIMITED 
  

Report of the Directors 
  
 The Directors submit their report together with the accounts for the year to 31 December 2003. 
  
 1. Principal activity for the year 
  
 The principal activity of the Company is to acquire an interest in a portfolio of mortgage loans and enter into financial arrangements with other group companies in that
connection. No future changes are envisaged. 
  
 The Company invests in beneficial
interests in the assets of Holmes Trustees Limited (“the Trust”), which assets comprise mortgage loans secured on residential property in England, Scotland and Wales. The Company receives a share of income from the Trust in proportion to
its share of the total mortgage assets of the Trust. 
  
 During the year the
Company purchased a further beneficial interest in the assets of the Trust of £2.4 billion on 26 March. This purchase was financed by a loan from Holmes Financing (No. 7) plc. Holmes Trustees Limited and Holmes Financing (No. 7) plc are both
group undertakings. 
  
 2. Results and Dividends 
  
 The results for the year are set out on page 4. The loss of £5,011,000 (2002 –
loss of £8,272,000) will be transferred from reserves. The Directors do not recommend the payment of a dividend (2002: £nil). 
  
 The loss in the year has arisen as a result of the charge for provisions made against the Company’s investment. On the release or utilisation of this provision in
future years, the Directors anticipate that the Company will make a profit. 
  
 3. Directors and their interests 
  
 The Directors who served
throughout the year, except as noted below were: 
  
 M McDermott 
 R.Wise (resigned on 23 May 2003) 
 D.Green (appointed on 23 May 2003)

 SPV Management Limited 
  
 At the year-end and the previous year-end, Holmes Holdings Limited held one share in the Company. Holmes Holdings Limited and M McDermott jointly held the other share.

  
 SPV Management Ltd and M. McDermott held one share in the holding company,
Holmes Holdings Limited, at the year-end. The other share in Holmes Holdings Limited was held by SPV Management Limited. M. McDermott is also a Director of SPV Management Limited. 
  
 None of the other Directors had a beneficial interest in the shares of the Company, or of the holding company, Holmes Holdings Limited, at
the year-end. 
  

 Page 1 








 HOLMES FUNDING LIMITED 
  

Report of the Directors (continued) 
  
 4. Directors’ Responsibility in respect of the Preparation of Accounts 
  
 The Directors are required by United Kingdom company law to prepare accounts for each financial year that give a true and fair view of the
state of affairs of the Company as at the end of the financial year, and of the profit or loss for that year. 
  
 The Directors confirm that suitable accounting policies have been used and applied consistently and reasonable and prudent judgements and estimates have been made in the preparation of the accounts for the year ended
31 December 2003. The Directors also confirm that applicable accounting standards have been followed and that the statements have been prepared on the going concern basis. 
  
 The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial
position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for the Company’s system of internal control and for safeguarding the assets of the Company and
hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 
  
 5. Going concern 
  
 The Directors confirm
that they are satisfied that Holmes Funding Limited has adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt a going concern basis in preparing the financial statements. 
  
 6. Auditors 
  
 On 1 August 2003, Deloitte & Touche, the Company’s auditors transferred their business to Deloitte & Touche LLP, a limited
liability partnership incorporated under the Limited Liability Partnerships Act 2000. The Company’s consent has been given to treating the appointment of Deloitte & Touche as extending to Deloitte & Touche LLP with effect from 1 August
2003 under the provisions of section 26(5) of the Companies Act 1989. 
  
 The
Company has elected to dispense with the obligation to appoint auditors annually and, accordingly, Deloitte & Touche LLP will be the auditors of the company for the forthcoming financial year under the provisions of section 386(2) of the
Companies Act 1985. 
  
 By order of the Board

  
 /s/    Cheryl Samuels

 For and behalf of 
 Abbey National Secretariat Services
Limited, Secretary 
  
 25 June 2004 

 
 Registered Office: 
 Abbey National House 
 2 Triton Square, 
 Regent’s Place, 
 London, 
 NW1 3AN. 
  

 Page 2 








 HOLMES FUNDING LIMITED 
  
 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF 
 HOLMES FUNDING
LIMITED 
  
 We have audited the financial statements of Holmes Funding Ltd
for the year ended 31 December 2003 which comprise the profit and loss account, the balance sheet and the related notes 1 to 16. These financial statements have been prepared under the accounting policies set out therein. 
  
 Respective responsibilities of directors and auditors 
  
 As described in the statement of directors’ responsibilities, the company’s
directors are responsible for the preparation of the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibility is to audit the financial statements in accordance with relevant United Kingdom
legal and regulatory requirements and auditing standards. 
  
 We report to you our opinion as to whether the financial statements give a true and fair view
and are properly prepared in accordance with the Companies Act 1985. We also report if, in our opinion, the directors’ report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not
received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and transactions with the company is not disclosed. 
  
 We read the directors’ report for the above year and consider the implications for our
report if we become aware of any apparent misstatements. 
  
 Basis of audit
opinion 
  
 We conducted our audit in accordance with United Kingdom auditing
standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed. 
  
 We planned and performed our audit so as to obtain all the information and explanations which
we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion,
we also evaluated the overall adequacy of the presentation of information in the financial statements. 
  
 Opinion 
  
 In our opinion the financial
statements give a true and fair view of the state of the company’s affairs as at 31 December 2003 and of its loss for the year then ended and have been properly prepared in accordance with the Companies Act 1985. 
  
 Deloitte & Touche LLP 
 Chartered Accountants and Registered Auditors 
 London, England 
  
 25 June 2004 
  

 Page 3 








 HOLMES FUNDING LIMITED 
  

Profit and Loss Account 
 For the year ended 31 December 2003

  

									
	 	  	Note

	  	2003
£’000

	 	 	2002
£’000

	 
	 Interest receivable and similar income
	  	2	  	650,204	 	 	578,768	 
	 Interest payable
	  	3	  	(599,306	)	 	(526,854	)
	 	  	 	  	
	
	 	
	

	 Net interest income
	  	 	  	50,898	 	 	51,914	 
				
	 Administrative expenses
	  	 	  	(50,440	)	 	(52,081	)
	 Provision against investment in Trust property
	  	6	  	(7,618	)	 	(11,644	)
	 	  	 	  	
	
	 	
	

	 LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION
	  	4	  	(7,160	)	 	(11,811	)
				
	 Tax on loss on ordinary activities
	  	1, 5	  	2,149	 	 	3,539	 
	 	  	 	  	
	
	 	
	

	 LOSS ON ORDINARY ACTIVITIES AFTER TAXATION AND RETAINED LOSS FOR THE YEAR
	  	13	  	(5,011	)	 	(8,272	)
	 	  	 	  	
	
	 	
	


  
 There is no difference between the
loss on ordinary activities before taxation and the retained loss for the year stated above and their historical cost equivalents. 
  
 All transactions are derived from continuing operations within the United Kingdom. 
  
 There are no recognised gains and losses in the year other than the loss for the year and therefore no statement of total and recognised
gains and losses is required. 
  

 Page 4 








 HOLMES FUNDING LIMITED 
  

Balance Sheet 
 As at 31 December 2003 
  

									
	 	  	Note

	  	 2003
 £’000

	 	 	 2002
 £’000

	 
	 FIXED ASSETS
	  	 	  	 	 	 	 	 
	 Beneficial interest in mortgage portfolio
	  	6	  	13,341,978	 	 	13,679,484	 
				
	 CURRENT ASSETS
	  	 	  	 	 	 	 	 
	 Debtors
	  	7	  	24,751	 	 	28,599	 
	 Deferred taxation asset
	  	1, 9	  	6,618	 	 	4,449	 
	 Cash at bank and in hand
	  	8	  	1,200,597	 	 	1,202,356	 
	 	  	 	  	
	
	 	
	

	 	  	 	  	1,231,966	 	 	1,235,404	 
				
	 CREDITORS - amounts falling due within one year
	  	10	  	(743,837	)	 	(1,166,612	)
	 	  	 	  	
	
	 	
	

	 NET CURRENT ASSETS
	  	 	  	488,129	 	 	68,792	 
	 	  	 	  	
	
	 	
	

	 TOTAL ASSETS LESS CURRENT LIABILITIES
	  	 	  	13,830,107	 	 	13,748,276	 
	 	  	 	  	
	
	 	
	

	 CREDITORS - amounts falling due after more than one year
	  	11	  	(13,845,377	)	 	(13,758,535	)
	 	  	 	  	
	
	 	
	

	 NET LIABILITIES
	  	 	  	(15,270	)	 	(10,259	)
	 	  	 	  	
	
	 	
	

	 CAPITAL AND RESERVES
	  	 	  	 	 	 	 	 
				
	 Called-up share capital
	  	12	  	—  	 	 	—  	 
	 Profit and loss account
	  	 	  	(15,270	)	 	(10,259	)
	 	  	 	  	
	
	 	
	

	 EQUITY SHAREHOLDERS’ DEFICIT
	  	13	  	(15,270	)	 	(10,259	)
	 	  	 	  	
	
	 	
	


  
 The financial statements on page 4 to
11 were approved by the Board of Directors on 25 June 2004. 
  
 Signed on behalf
of the Board of Directors 
  
 /s/    Martin McDermott 
 Director 
  

 Page 5 








 HOLMES FUNDING LIMITED 
  
 Notes to the Accounts for the year ended 31 December 2003 
  
 1. Accounting Policies 
  
 Basis of Accounting 
  
 The financial statements are prepared under the historical cost convention and in accordance with applicable United Kingdom law and accounting standards.
The particular accounting policies adopted are described below. 
  

	(1)	Interest receivable is recognised on an accruals basis. 

  

	(2)	Investments held as fixed assets are stated at cost less provision for any impairment. 

  

	(3)	Specific provisions are made against loans and advances which comprise the trust property in which the Company has a beneficial interest, when, as a result of regular appraisals of
the assets, it is considered that recovery is doubtful. A general provision is made against loans and advances to cover bad and doubtful debts that have not been separately identified but which are known from experience to be present in any
portfolio of loans and advances. The specific and general provisions are deducted from loans and advances. Provisions made during the year, less amounts released and recoveries of amounts written off in previous years are charged to the profit and
loss account. 

  

	(4)	Deferred consideration is payable to the originator of the loans and advances to customers, which is based upon the profitability of the company before the charge for the general
provision for bad and doubtful debts. This has resulted in a loss to date, however the directors anticipate that the company will make a profit over the life of the mortgage portfolio. 

  

	(5)	Value added tax is not recoverable by the Company and is included with its related cost. 

  

	(6)	Transactions are undertaken in derivative financial instruments, “derivatives”, which include interest rate swaps. Derivatives are entered into for the purpose of
eliminating risk from potential movements in interest rates inherent in the Company’s non-trading assets and liabilities. Non-trading assets and liabilities are those intended for use on a continuing basis in the activities of the Company.


  
 A derivative is designated as non-trading where
there is an offset between the effects of potential movements in market rates of the derivative and the designated asset or liability being hedged. Non-trading derivatives are reviewed regularly for their effectiveness as hedges. Non-trading
derivatives are accounted for on an accruals basis, consistent with the asset or liability being hedged. Income and expense on non-trading derivatives are recognised as they accrue over the life of the instruments as an adjustment to interest
receivable or payable. 
  

	(7)	The Company is a wholly owned subsidiary of Holmes Holdings Limited, a Company incorporated in Great Britain. Accordingly the Company is not required to produce a cash flow
statement as prescribed in paragraph 5 (a) of FRS 1 (revised 1996), “Cash flow statements”. 

  

	(8)	Deferred taxation is provided on all timing differences that have not reversed before the balance sheet date at the rate of tax expected to apply when those timing differences will
reverse. Deferred tax assets are recognised to the extent that they are regarded as recoverable. 

  

	(9)	Costs relating to the acquisition of the trust asset are deferred and charged over the period in which interest is earned on the asset. 

  
 2. Interest Receivable and Similar Income 
  

							
	 	  	2003
£’000

	 	 	2002
£’000

	 
	 Income from beneficial interest in mortgage portfolio
	  	708,024	 	 	648,054	 
	 Expense from derivatives used to hedge beneficial interest in mortgage portfolio
	  	(91,841	)	 	(93,842	)
	 Bank interest receivable
	  	34,021	 	 	24,556	 
	 	  	
	
	 	
	

	 	  	650,204	 	 	578,768	 
	 	  	
	
	 	
	


  
 The mortgage portfolio is held on
trust by Holmes Trustees Limited, a group undertaking. 
  

 Page 6 








 HOLMES FUNDING LIMITED 
  
 Notes to the Accounts for the year ended 31 December 2003 (continued) 
  
 3. Interest Payable 
  

					
	 	  	2003
£’000

	  	2002
£’000


	 Interest payable on loans from group undertakings
	  	596,486	  	524,200
	 Interest payable on start-up loans
	  	2,820	  	2,654
	 	  	
	  	

	 	  	599,306	  	526,854
	 	  	
	  	


  
 4. Loss on Ordinary Activities
before Taxation 
  
 Loss on ordinary activities before taxation is stated
after charging: 
  

					
	 	  	2003
£’000

	  	2002
£’000


	 Auditors’ remuneration - audit fees
	  	107	  	23
	 	  	
	  	


  
 The Company has no employees (2002:
none) other than its directors. 
  
 No emoluments were paid to the Directors by
the Company during the year (2002: £nil). 
  
 5. Tax on Loss on Ordinary
Activities 
  

							
	 	  	2003
£’000

	 	 	2002
£’000

	 
	 UK corporation tax for the year at 28% (2002: 28%)
	  	20	 	 	27	 
	 Adjustments in respect of prior years
	  	—  	 	 	7	 
	 Deferred taxation
	  	(2,169	)	 	(3,573	)
	 	  	
	
	 	
	

	 Tax receivable
	  	(2,149	)	 	(3,539	)
	 	  	
	
	 	
	


  
 The company pays corporation tax at
30% with marginal relief. 
  
 The tax charge in the year arises due to the
disallowable general provision on the Trust mortgage income. 
  
 The tax assessed
for the year is higher than the standard 30% rate of corporation tax in the UK. The differences are explained below: 
  
 The corporation tax charge is made up as follows: 
  

							
	 	  	2003
£’000

	 	 	2002
£’000

	 
	 Loss on ordinary activities before tax
	  	(7,160	)	 	(11,811	)
	 	  	
	
	 	
	

	 Loss on ordinary activities multiplied by standard rate of corporation tax in the UK of 30%
	  	(2,148	)	 	(3,543	)
			
	 Effects of:
	  	 	 	 	 	 
	 Non tax-deductable general provisions
	  	2,169	 	 	3,573	 
	 Benefit of small companies corporation tax rate
	  	(1	)	 	(3	)
	 Adjustments to tax charge in respect of previous periods
	  	—  	 	 	7	 
	 	  	
	
	 	
	

	 	  	20	 	 	34	 
	 	  	
	
	 	
	



	

  

 Page 7 








 HOLMES FUNDING LIMITED 
  
 Notes to the Accounts for the year ended 31 December 2003 (continued) 
  
 6. Beneficial interest in mortgage portfolio 
  

							
	 	  	 2003
 £’000

	 	 	 2002
 £’000

	 
	 Cost:
	  	 	 	 	 	 
	 At 1 January
	  	13,694,537	 	 	11,973,516	 
	 Additions
	  	2,403,550	 	 	3,999,221	 
	 Capital repayments
	  	(2,733,372	)	 	(2,278,200	)
	 	  	
	
	 	
	

	 At 31 December
	  	13,364,715	 	 	13,694,537	 
	 	  	
	
	 	
	

	 Provisions:
	  	 	 	 	 	 
	 At 1 January
	  	 	 	 	 	 
	 General
	  	14,831	 	 	2,921	 
	 Specific
	  	222	 	 	605	 
	 	  	
	
	 	
	

	 	  	15,053	 	 	3,526	 
	 Transfer from profit and loss account
	  	7,618	 	 	11,644	 
	 Irrecoverable amounts written back / (off)
	  	66	 	 	(117	)
	 	  	
	
	 	
	

	 At 31 December
	  	22,737	 	 	15,053	 
	 	  	
	
	 	
	

	 Being:
	  	 	 	 	 	 
	 General
	  	22,061	 	 	14,831	 
	 Specific
	  	676	 	 	222	 
	 	  	
	
	 	
	

	 	  	22,737	 	 	15,053	 
	 	  	
	
	 	
	

	 Net book value:
	  	 	 	 	 	 
	 At 31 December
	  	13,341,978	 	 	13,679,484	 
	 	  	
	
	 	
	

	 Repayable:
	  	 	 	 	 	 
	 On demand or at short notice
	  	29,808	 	 	6,395	 
	 In not more than three months
	  	36,913	 	 	60,767	 
	 In more than three months but not more than one year
	  	219,416	 	 	187,805	 
	 In more than one year but not more than five years
	  	1,319,525	 	 	1,131,596	 
	 In more than five years
	  	11,759,053	 	 	12,307,974	 
	 	  	
	
	 	
	

	 At 31 December 2003
	  	13,364,715	 	 	13,694,537	 
	 	  	
	
	 	
	

	 Fixed rate
	  	2,380,538	 	 	3,674,765	 
	 Variable rate
	  	10,984,177	 	 	10,019,772	 
	 Less: provisions (see note 4)
	  	(22,737	)	 	(15,053	)
	 	  	
	
	 	
	

	 	  	13,341,978	 	 	13,679,484	 
	 	  	
	
	 	
	


  
 The mortgage
portfolio in which the Company holds a beneficial interest is held on trust for the Company and the originator of the mortgage loans by Holmes Trustees Limited, a group undertaking. During the year the company increased its interest in the trust
property in one tranche. The mortgage loans are secured on residential property in England and Wales. At 31 December 2003 the total mortgage assets held on trust for the beneficiaries amounted to £23,162,383,000 (2002 - £23,104,300,000).
 
  

 Page 8 








 HOLMES FUNDING LIMITED 
  
 Notes to the Accounts for the year ended 31 December 2003 (continued) 
  
 7. Debtors 
  

					
	 	  	 2003
 £’000

	  	 2002
 £’000


	 	  	  
	 Other debtors
	  	24,751	  	28,599
	 	  	
	  	

	 Total
	  	24,751	  	28,599
	 	  	
	  	


  
 8. Cash at bank and in hand

  

					
	 	  	 2003
 £’000

	  	 2002
 £’000


	 	  	  
	 Guaranteed Investment Contract
	  	1,182,231	  	1,202,356
	 Share of Trust cash
	  	18,366	  	—  
	 	  	
	  	

	 Total
	  	1,200,597	  	1,202,356
	 	  	
	  	


  
 The Guaranteed
Investment Contract pays interest based on LIBOR. 
  
 9. Deferred taxation
asset 
  

					
	 	  	 2003
 £’000

	  	 2002
 £’000


	 	  	  
	 As at 1 January
	  	4,449	  	876
	 Transfer to profit and loss account
	  	2,169	  	3,573
	 	  	
	  	

	 As at 31 December
	  	6,618	  	4,449
	 	  	
	  	

	 Provided on:
	  	 	  	 
	 General provision against beneficial interest in mortgage portfolio
	  	6,618	  	4,449
	 	  	
	  	


  
 The deferred tax asset
has been recognised under FRS 19 (Deferred tax) since it is considered more likely than not that there will be sufficient future profits against which the future reversal of the general provision can be deducted. 
  
 10. Creditors: amounts falling due within one year 
  

					
	 	  	 2003
 £’000

	  	 2002
 £’000


	 	  	  
	 Loans from group undertakings
	  	482,320	  	961,292
	 Amounts due to group undertakings
	  	129,940	  	178,889
	 Corporation tax
	  	20	  	28
	 Other creditors
	  	120,787	  	20,907
	 Accrued interest payable
	  	10,770	  	5,496
	 	  	
	  	

	 Total
	  	743,837	  	1,166,612
	 	  	
	  	


  

 Page 9 








 HOLMES FUNDING LIMITED 
  
 Notes to the Accounts for the year ended 31 December 2003 (continued) 
  
 11. Creditors: amounts falling due after more than one year 
  

					
	 	  	 2003
 £’000

	  	 2002
 £’000


	 	  	  
	 Loans from group undertakings
	  	13,627,717	  	13,593,987
	 Start-up loans
	  	74,546	  	62,450
	 Other creditors
	  	143,114	  	102,098
	 	  	
	  	

	 Total
	  	13,845,377	  	13,758,535
	 	  	
	  	

	 The amounts are repayable as follows:
	  	 	  	 
			
	 Due 2 – 5 years
	  	4,566,917	  	3,447,498
	 Due over 5 years
	  	9,278,460	  	10,311,037
	 	  	
	  	

	 Total
	  	13,845,377	  	13,758,535
	 	  	
	  	


  
  
 Interest payable on the loans from group undertakings and the start-up loans is based on LIBOR. 
  
 Amounts due over 5 years are paid in order of priority when cash is
available after other commitments have been fulfilled. 
  
 12. Share Capital

  

					
	 	  	 2003
 £’000

	  	 2002
 £’000


	 	  	  
	 Authorised:
	  	 	  	 
	 100 Ordinary shares of £1 each
	  	—  	  	—  
	 	  	
	  	

	 Called up, allotted and fully paid:
	  	 	  	 
	 2 Ordinary shares of £1 each
	  	—  	  	—  
	 	  	
	  	


  
 13. Reconciliation of Movements in
Shareholders’ Deficit 
  

				
	 	  	 2003
 £’000

	 
	 	  
	 Opening shareholders’ deficit
	  	(10,259	)
	 Retained loss for the year
	  	(5,011	)
	 	  	
	

	 Closing shareholders’ deficit
	  	(15,270	)
	 	  	
	


  
 14. Capital Commitments and
Contingent Liabilities 
  
 There were no outstanding capital
commitments or contingent liabilities at 31 December 2003 (2002 - £nil). 
  
 15. Related Party Transactions 
  
 The Company
has taken advantage of the exemption covered by paragraph 3 (c) of FRS 8, “Related party disclosures”, not to disclose transactions with entities that are part of the Holmes Group. 
  

 Page 10 








 HOLMES FUNDING LIMITED 
  
 Notes to the Accounts for the year ended 31 December 2003 (continued) 
  

	16.	Parent and Controlling Party 

  
 The immediate parent of the Company is Holmes Holdings Limited, a company incorporated in Great Britain and registered in England and Wales, which
prepares the only accounts into which the Company is consolidated. 
  
 SPV Management Limited, a company incorporated in Great Britain and registered in England and Wales, holds all of the shares in the Company (one jointly with M McDermott as nominee) as trustee under a discretionary charitable trust dated 17
February 1999 for the benefit of nurses employed in the UK and for charities. 
  
 The administration, operations, accounting and financial reporting functions of the Company are performed by Abbey National plc, which is incorporated in Great Britain. During the year, Abbey National plc has
delegated administration and servicing functions in respect of the loans on behalf of the mortgages’ trustee and the beneficiaries to a service provider. 
  

 Page 11